What does Fed rate-cut means for Indian market

The central bank of the United States, after its meeting on Wednesday, announced its decision to bring down the benchmark overnight lending rate to a target range by 25 basis points to between 1.75 per cent and 2 per cent. This is the second consecutive rate-cut by the Federal Reserve in last three months. The decision was not unanimous as seven out of ten FOMC members approved the 25 basis point cut and one member opted for a 50 bps cut, whereas 2 members were in favour of holding the rates at its previous range of 2 to 2.25 per cent. The rate-cut decision was largely driven by global macro-economic outlook as well as muted inflation pressure.

In addition, the Federal Reserve Chairman gave a statement that the Fed does not see any rate reduction till 2021. In fact, there is projection of interest rates rising in 2021.

Impact on India: The policy stance of the US Fed does not paint a gloomy picture but reflects decent strength of the US economy. This should bode well for India. One of the reasons cited for lower economic activity in India is growth concerns of its trading partners. With US on a reasonably good footing, if domestic growth concerns are addressed well, then Indian economy may perform well. Lingering risks of global economic slowdown in the coming years have eased for now. We see this as a positive cue for India as fears of global economic slowdown impact were expected to drag into 2020, thus limiting Indian recovery.

However, what has not gone well with the Indian market is no indication by Fed on further quantitative easing by the US Fed. This doesn’t bode well for FII flows to Indian equities. In the last few months, we have seen FIIs exiting Indian equity market, which is likely to impact the Indian market.

For the debt market, this rate cut was largely discounted and bond yields rose marginally in Thursday’s trade.  We believe the bond yield in India has bottomed out and even if the RBI lowers the repo rate by 60-80 bps, which will take the yields lower from the current levels, any downside below 6.0 per cent-6.20 per cent looks unlikely.